Pre-election policy analysis: Superannuation

(C1) Enshrine in legislation that the objective of superannuation is ‘to provide income in retirement to substitute or supplement the Age Pension’.

(C2) Introduce a $1.6 million superannuation transfer balance cap on the total amount of superannuation that an individual can transfer into retirement phase accounts.

(C3) Lower the Higher Income Superannuation Charge (HISC) threshold. So, those with combined incomes and superannuation contributions greater than $250,000 are to pay 30% tax on their concessional contributions (up from 15%), extending the current treatment of people with combined incomes and superannuation contributions over $300,000.

(C4) Reduce the concessional contributions cap from $30,000 (for under-50s) and from $35,000 (for over 50s) to $25,000.

(C6) Introduce catch-up concessional superannuation contributions by allowing unused concessional contribution caps to be carried forward on a rolling basis for up to five years for those with account balances of $500,000 or less.

(C7) Raise the current spouse tax offset, i.e. the current income threshold for the receiving spouse, from $10,800 to $37,000.

(G1) Implement progressive tax rates on superannuation contributions with a government co-contribution for individuals below the tax-free threshold of $18,200 of 15 cents for each dollar of concessional superannuation contributions.

The first pillar is a government provided pension for Australians of retirement age, this currently being 65 years but gradually increasing to 67 years, and who satisfy the required assets and income tests.

The Age Pension is not the subject of any major party’s policy at this election, having had its threshold for the assets test (excluding own home but including superannuation and other assets) for couples reduced from $1.17 million to about $800,000 effective from 1st January 2017.

The second pillar is the Superannuation Guarantee (SG), which is a compulsory contribution made by employers on behalf of eligible employees. Currently the SG is 9.5% of the lesser of the gross salary and the maximum contribution base. The SG level is to remain at 9.5% until 30th June 2021, after which it is scheduled to increase by 0.5% annually until it reaches 12% on 1st July 2025.

The third pillar consists of voluntary contributions, paid either from pre-tax earnings or post-tax earnings of an employee into his superannuation account.

The proposed superannuation policies of the main parties are focussed on the tax treatment of voluntary contributions and the threshold levels at which these are applied.

When paid from pre-tax earnings, there is a tax rate of 15% applied to voluntary contributions below a threshold of $30,000 p.a. for under-50s and $35,000 p.a. for 50s-and-over.

There is an additional tax called Division 293 tax which is an extra 15% tax on super contributions if your combined income and super contributions are more than $300,000 a year.

Prior to the introduction of the Superannuation Guarantee and voluntary contributions, Australians relied on the Age Pension for their retirement income, barring a small percentage which had corporate superannuation policies. The Age Pension was enacted federally with the Invalid and Old-Age Pension Act 1908 and has undergone several changes regarding eligibility.

Impact of policies

With the government seeking to balance the budget, it is seeking to extract tax revenues from many sources, one being superannuation.

Impact of the Coalition Policies:

(C1) The government wishes to abrogate responsibility of retirement income provision to those who have ample superannuation savings.

(C2) This policy puts a limit on taxpayer support for tax-free retirement phase accounts, but does not limit the savings that can be accumulated outside these accounts or outside superannuation. The Liberal Party states that the policy could raise about $2 billion over 3 years. If, as a result of the changes, wealthy individuals choose to invest their money in lower tax-rate investment vehicles then tax revenue could be lower.

(C3) This policy will only affect a minority of superannuation fund members but, if not indexed, will potentially garner significant tax revenue in future years.

(C4) The impact will be a decline in the annual level of voluntary contributions into the superannuation savings pool.

(C5) The impact of this policy will be to will limit the extent to which the superannuation system can be used for tax minimisation and estate planning, which is clearly not its purpose. The effect of a lifetime cap of $500,000 on the current annual cap of $180,000 will be to save the Government $550 million over the next four years.

(C6) A desired impact of this policy will be to allow those with lower contributions or with interrupted or irregular work patterns to make ‘catch-up’ payments to boost their superannuation savings.

(C7) This policy aims to improve the superannuation balances of low income spouses and therefore assist more families to support each other in accumulating superannuation.

Impact of the Australian Labor Party Policies:

(L1) The first policy appears to target superannuation accounts with balances of around $1.5 million, based on an assumed earnings rate of 5% p.a. However, if earnings fall below 5% then more than the expected number superannuation accounts will earn below $75,000 p.a. and there will be less than expected tax revenue. On the other hand, as superannuation account balances increase, this policy will likely reap more than expected levels of tax revenue.

(L2) The second policy is identical to the corresponding one of the Liberal Party and its impacts will be the same.

Impact of the Greens’ Policies:

(G1) The Greens state that their approach to superannuation reform would raise up to $11 billion over 4 years. According to APRA’s quarterly statistics, there were $104 billion of contributions for the year ended 31st March 2016. Assuming these were all taxed at 15% this would yield $15.6 billion in tax revenue for the year. Further, assuming an average Greens superannuation tax rate of 17.5% then the Greens’ policy would yield an additional $2.6 billion in tax revenue for the year.

Similar policies, similar effects

A general, and obvious, comment is that all the Coalition and Australian Labor parties are proposing to limit concessions on superannuation contributions and potentially earnings. The Coalition and Australian Labor Party are in agreement on HISC policy and have similar policies regarding taxation of large superannuation account balances. The Greens propose having progressive tax rates on superannuation.

All other things being equal, this will reduce the size of annual contributions into the $2 trillion savings pool and the level of benefits payable in retirement.

The 15% tax on superannuation fund earnings has been a strong incentive for Australians to save for retirement and with a budget deficit to be remedied it has become one of many targets for tax revenue.

The prime purpose of superannuation is to provide an adequate retirement income. However, the concessional tax rate for earnings from superannuation funds has also encouraged the use of superannuation as a low-tax investment vehicle for wealthy individuals.

It can be said that while most of the policies do not affect most Australians, the ability of current savings to provide future retirees adequate income, outside of the Age Pension, is questionable. For example, in the absence of salary increases and investment returns, 10% of salary contributed annually over a 40-year working life will provide a retiree living 20 years with an annual income equal to 20% of his/her working life salary.

Other key facts

Regarding the investment choices of superannuation funds, Australians are holding close to 10% of their superannuation in cash, and have reduced their equity allocation to below 50% and increased their allocations to debt (20%) and property and infrastructure (15%).

Also, the industry-wide average return on superannuation entities was -1.5% for the year ended 31st March 2016 and 6.7% p.a. for the five years ended 31st March 2016.

In a world awash with excess debt, these allocations do not represent sound risk management over the shorter term and may likely affect the adequacy of superannuation savings for retirement income.